MBIA Swaps Rise as Insurer Cites ‘Substantial Doubt’ Over Unit

The cost to protect against a default by a unit of MBIA Inc. rose after the insurer said there is “substantial doubt” about the ability of the unit to continue as a going concern.

Credit-default swaps protecting investors against a default by MBIA Insurance Corp. rose 3.4 percentage points to 43.8 percent upfront, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. That means it would cost $4.38 million initially and $500,000 annually to protect $10 million of obligations.

MBIA and Bank of America Corp. have been negotiating the settlement of lawsuits over mortgage securities that soured during the U.S. housing crisis five years ago. The MBIA unit guaranteed contracts protecting BofA and its subsidiaries from losses on commercial-mortgage debt. At the same time, MBIA is seeking to force the bank to buy back faulty loans that were included in residential-mortgage securities that MBIA insured.

“The company has concluded that there is a significant risk” of the MBIA Insurance subsidiary “being placed into a rehabilitation or liquidation proceeding” by New York state’s financial regulator, the insurer said in a statement yesterday. “Therefore, substantial doubt exists about MBIA Corp.’s ability to continue as a going concern.”

‘Comprehensive Settlement’

While MBIA said it expects the unit will have adequate cash to cover claims, that forecast hinges on a “comprehensive settlement” with the bank, it said in the statement yesterday.

Kevin Brown, a spokesman for Armonk, New York-based MBIA, and Lawrence Grayson, a spokesman for Charlotte, North Carolina-based Bank of America, declined to comment.

The New York State Department of Financial Services denied requests in the fourth quarter of last year to draw on a National Secured loan or alternate financing, to fund a commutation with a credit-default swap counterparty, the insurer said yesterday in its annual report filed with the Securities and Exchange Commission.

The company is limited by its liquidity to end transactions, “all of which could be subject to regulatory approval,” MBIA said in the filing. “There can be no assurance that MBIA will be able to fund further commutations by borrowing from National or otherwise.”

Swaps tied to the parent company increased 0.8 percentage point to 16 percent upfront, the data show. MBIA split its municipal-bond insurance business into a new unit in 2009.

Orphaned Unit

In a move to prevent the parent company from being dragged into bankruptcy by the insurance unit, MBIA last year asked bondholders to alter the terms of its bonds. After Bank of America bid to buy some of the debt to block the amendment, the insurer purchased about 52 percent of the securities in order to ensure it had sufficient support.

“What MBIA did was orphan the MBIA Insurance unit with the consent solicitation, so the concern had been previously that if MBIA Insurance ran out of liquidity and it was seized by its regulator, that rehabilitation would trigger a cross default,” Mark Palmer, an equity analyst for BTIG LLC, a trading firm in New York, said in a telephone interview.

Bank of America sued the debt insurer in December, saying it interfered with the tender offer for the securities involved in the consent solicitation.

Before it's here, it's on the Bloomberg Terminal.